Nordstrom discovers the high cost of merged channel

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Has the chain that best understands customer service figured out merged channel and enterprise IT, too?

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Nordstrom, a longtime leader in customer service in-store, is learning how expensive a merged channel strategy is. But as it fights its way through new costs, it is illustrating the changing nature of retail itself.

What is the cost of high-touch customer service, also known as pampering shoppers? How much do those little extras return in customer loyalty and higher revenue? Does an additional $10,000 worth of extra customer attention mean that the advertising budget can be dropped $20,000 with no loss in revenue?

Several years ago, I was at a reception at the National Retail Federation show and ran into the CIO for a Fortune 100 chain. I asked him what percentage of his sales were then e-commerce and when he could consider his employer to be a true merged channel retailer. Without a pause, he shot back, "The second answer will be 'right now' the instant I am no longer able to answer the first question."

His point, which was precisely correct, is that as long as retailers keep thinking of e-commerce and m-commerce sales as different from physical store sales and call center sales (numbers that are generally plummeting throughout retail), a true merged-channel execution isn’t possible. How constructive would be a store manager be if she tracked the sales from customers who entered the west entrance differently from those who entered through the north entrance? How a customer gets to the shopping area should be irrelevant.

Nordstrom CFO Michael Koppel said in an investor call last week that a merged-channel "business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments." That's CFO-speak for "it usually costs more."

"In evolving with our customers, we made significant investments to enable customers to shop in multiple ways. This has resulted in market share gains, but also structural changes to our operating costs. For example, e-commerce now represents over 20% of our sales, a notable increase from 8% five years ago," Koppel said. "With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales."

Koppel understands the issue, though, which makes him one of the few CFOs who truly does. He argued that online — and for this discussion, that includes mobile — commerce "is a model that behaves enormously different than the mall-based model. And so we have a lot to learn about that and we have to keep our lens on as it relates to how the customer sees us and how the customer wants to be served, but at the same time, we have to do it effectively."

That is key. Notice his choice of words: "How the customer sees us and how the customer wants to be served." Lots of retailers talk a lot about customer-centric, but Nordstrom is one of the few that internalizes it into all of its thinking.

Shoppers are treated with respect, which means letting them buy and receive merchandise in the manner that they want, not the manner that is most cost-effective for the retailer.

Let's take this back to core IT issues. Koppel was asked about planned reductions in IT spending increases. This is how he replied: "So we've made a really, really big commitment there. And I think part of what we've learned along that journey is that we could likely be more productive with that capital. And we highlighted a couple things that we believe long term are going to generate a lot of value. One is having a scalable inventory management tool that can support us well past $20 billion and can support multi-channel. And the second is to re-architect how we think about our technology so as we want to add new features and new applications, we can do it very efficiently and cost-effectively. And we think over the long run, that's going to have big payback."

So we have here a CFO who truly gets merged channel strategy as well as the value of strong enterprise IT. A guy could get to like Nordstrom.

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